JP Fyfe, Inc. of Florida v. Bradco Supply Corp.

• Decision Date: 30 November 1988
• Docket Number: Civ. No. 88-4030(CSF).
• Citation: 96 BR 474
• Parties: In the Matter of J.P. FYFE, INC. OF FLORIDA, Plaintiff, v. BRADCO SUPPLY CORPORATION, Defendant.
• Court: U.S. District Court — District of New Jersey

96 B.R. 474 (1988)

In the Matter of J.P. FYFE, INC. OF FLORIDA, Plaintiff, v. BRADCO SUPPLY CORPORATION, Defendant.

Civ. No. 88-4030(CSF).

United States District Court, D. New Jersey.

November 30, 1988.

Budd Larner Gross Picillo, Rosenbaum Greenberg & Sade, P.C. by Suzanne M. Klar, Short Hills, N.J., for defendant.

Klehr, Harrison, Harvey, Branzburg, Ellers & Weir by Carol Ann Slocum, Cherry Hill, N.J., for plaintiff.

OPINION

CLARKSON S. FISHER, District Judge.

This matter is before the court on the appeal of Bradco Supply Corporation ("Bradco") from a judgment entered against it by the United States Bankruptcy Court for the District of New Jersey. The essential facts are as follows. Bradco was engaged in the business of supplying roofing materials to J.P. Fyfe, Inc. of Florida and a related company, J.P. Fyfe, Inc. of New Jersey. (The "Fyfe companies"). Bradco had supplied the New Jersey company for ten years and had sold material to the Florida corporation for approximately three years.

By September of 1985, however, the Fyfe companies were delinquent in their payment of a $500,000 existing debt to Bradco. At that time Mr. John Delage, an officer of the Fyfe companies, met with Mr. Barry Segal, Bradco's president, and Mr. Donald Hollingworth, Bradco's financial manager. Mr. Delage sought a deferment of the Fyfe companies' $500,000 debt, and Bradco agreed to defer payments until October of 1985. Bradco further requested additional information concerning the Fyfe companies' financial condition.

In October of 1985 Mr. Delage informed Bradco that the Fyfe companies were unable to satisfy their $500,000 debt. By this time the Fyfe companies' bank had withdrawn its continued financing of Fyfe companies' jobs, and several jobs were in difficulty. In November, Mr. Delage conferred with Messrs. Segal and Hollingworth in order to obtain a payment schedule more favorable to the Fyfe companies' straitened financial conditions. Bradco informed Mr. Delage that it obviously could not continue to furnish supplies without payment. Mr. Delage informed Bradco that he could not continue operating without building supplies to complete his existing jobs and that his financial conditions were such that new sources of supply were unavailable.

As a result of these and other communications the parties agreed to defer indefinitely all indebtedness incurred by October 31, 1985. All payments received after November 1, 1985 were to be credited against the Fyfe companies' current orders of roofing supplies. On the basis of estimates supplied by the Fyfe companies, Bradco set a ceiling of 130 thousand dollars' worth of roofing supplies for both companies per month. Payments were to be made at the end of each month, beginning in January of 1986, sixty days from the November 1st date.

Under this arrangement the Fyfe companies made payments in January and February of 1986 totalling $230,000, of which $130,000 pertained to the February payment. Mr. Hollingworth credited this sum to the Fyfe companies' current debt. He failed to notify Bradco's accounting department of this credit, however, and that department credited the sums against the Fyfe companies' pre-November debt to Bradco. On March 31, 1986 the Fyfe companies failed to make a payment, causing Bradco to consider them in default and to stop shipping material to them. The Fyfe companies filed for bankruptcy on May 16, 1986.

On August 1, 1988, the bankruptcy court allowed J.P. Fyfe, Inc. of Florida's trustee in bankruptcy to avoid the $130,000 February payment to Bradco. Bradco appealed that judgment to this court on the ground that the court below erroneously excluded the $130,000 payment from the "ordinary course of business" exception provided by 11 U.S.C. section 547(c)(2).

Before the court can address the substantive arguments of the parties, it must first determine the applicable standard of review. The bankruptcy court's determinations of fact shall not be set aside unless they are "clearly erroneous," but its conclusions of law may be reviewed in a plenary fashion. In re Morrissey, 717 F.2d 100, 104 (3d Cir.1983); Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101-02 (3d Cir.1981); Bankruptcy Rule 8013. Therefore, while the bankruptcy court's factual determinations will not be overturned without a showing of clear error, the court is free to determine whether or not the transfer evidenced by those facts is a voidable preference under section 547(c)(2). See e.g., Windsor Communications Group, Inc. v. Freedom Greeting Card Co., Inc., 63 B.R. 770, 773 (E.D.Pa. 1986) (raising and deciding legal issues not contemplated by bankruptcy court on the strength of the record as developed).

The court notes, however, that a section 547(c)(2) determination is a "peculiarly factual one," In re First Software Corp. (v. Curtis Mfg. Co.), 81 B.R. 211, 213 (D.Mass.1988), and that therefore the determination of the court below is to be accorded deference. In re Fulghum Constr. Corp., 78 B.R. 146, 150 (M.D.Tenn. 1987). Further, the court notes that it should not give untrammeled access to section 547(c)(2), but should construe the statute narrowly. See Id. at 212-13; Fulghum 78 B.R. at 152; accord, United States v. Rutherford, 442 U.S. 544, 552, 99 S.Ct. 2470, 2475, 61 L.Ed.2d 68 (1979) (holding that well-defined statutes should be closely followed according to their terms).

Section 547(c)(2) states, in pertinent part, that:

(c) The trustee may not avoid under this section a transfer —

* * * * * *

(2) to the extent that such transfer was —

(A) in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee;

(B) made in the ordinary course of business or financial affairs of the debtor and the transferee; and

(C) made according to ordinary business terms.

11 U.S.C. section 547(c)(2). Courts have consistently held that the statute requires the presence of each of the elements mentioned in subsection (c)(2)(A)-(C) before it will prohibit avoidance. See e.g. Windsor Communications, 63 B.R. at 773-75; In re Seawinds Ltd., 91 B.R. 88, 90 (N.D.Cal. 1988); In re First Software Corp. (v. Micro Educ. Corp.), 85 B.R. 669, 671 (D.Mass.1988); In re Magic Circle Energy Corp., 64 B.R. 269, 272 (W.D.Okla.1986). Because it seeks to have the transfer declared unavoidable, Bradco has the burden of demonstrating the applicability of the exception. First Software Corp. (v. Curtis), 81 B.R. at 212; Magic Circle, 64 B.R. at 272 n. 6; 11 U.S.C. section 547(g).

The parties do not dispute that appellee's February payment was made in satisfaction of a debt "incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee." 11 U.S.C. section 547(c)(2)(A). What is disputed is whether that payment satisfies subsections (c)(2)(B) and (C).

Subsection (c)(2)(B)'s phrase "in the ordinary course of business" is not defined by the Bankruptcy Code, and is left to judicial elucidation. The courts have considered this subsection to provide "a subjective test," which asks whether "the transfer was ordinary as between the debtor and the creditor?" In re Production Steel, Inc., 54 B.R. 417, 422 (M.D. Tenn.1985); Windsor Communications, 63 B.R. at 774. The court must examine the February payment in terms of the "relationship between the debtor and creditor as though that relationship were in a vacuum." Magic Circle, 64 B.R. at 272. In making this determination, the court may consider the prior course of conduct between the Bradco and appellee, with particular regard to the circumstances surrounding the February payment. See id. at 274; Production Steel, 54 B.R. at 423; Windsor Communications, 63 B.R. at 773-74; First Software Corp. (v. Micro Educ. Corp.), 85 B.R. at 672.

To be in "the ordinary course of business," the February payment need not possess a rigid similarity to each past transaction for materials between Bradco and appellee; Bradco need only "demonstrate some consistency with other business transactions" between it and appellee. Magic Circle, 64 B.R. at 273 (emphasis supplied). Nor must the February payment be a matter of bland routine between the parties: "The transaction need not have been common; it need only be ordinary. A transaction can be ordinary and still occur only occasionally." In re Economy Milling Co., Inc., 37 B.R. 914, 922 (D.S.C.1983).

However, the courts and other authorities require that the disputed transfer possess a sufficient degree of identity with preceding transactions that it could be compared to them without indicating a significantly adverse change in the debtor's liquidity. The general policy of subsection 547(c)(2) is:

to leave undisturbed normal financial relations, because it does not detract from the general policy of the preference section to discourage unusual action by either the debtor or his creditors during the debtor\'s slide into bankruptcy.

H.R.Rep. No. 595, 95th Cong., 1st Sess. 373, (1977) reprinted in 1978 U.S.Code Cong. & Admin.News, 5963, 6329; S.Rep. No. 989, 95th Cong., 2d Sess. 88, (1978) reprinted in 1978 U.S.Code Cong. & Admin.News, 5787, 5874 (emphasis supplied). Thus, the subsection has been held to "encourage creditors to continue short term credit dealings with troubled debtors in order to forestall bankruptcy rather than encourage it." In re Southern Commodity Corp., 78 B.R. 626, 628 (S.D.Fla.1987) (quoting In re Morris, 53 B.R. 190, 192 (D.Or.1985)) (emphasis supplied). As the First Circuit has stated:

There appears to be something of a consensus among courts and commentators on the purpose of this section, which one commentator has described as the protection of `recurring, customary credit transactions that are incurred and paid in the ordinary course of business of the debtor and the debtor\'s transferee.\'

WJM, Inc. v. Massachusetts Dept. of Public Welfare, 840 F.2d 996, 1011 (1st Cir. 1988) (quoting 4 Collier on...